How will Vodafone Idea issue impact debt mutual fund investments?

Vishal Dhawan is the founder of Plan Ahead Wealth Advisors, a wealth management and advisory firm, based in Mumbai.

Moslty asked questions by his clients these days:

• How will Vodafone idea issue impact our schemes? Can it get worse?
• How does side-pocketing and marking down a security help our schemes?
• Should we exit schemes hit by such issues?

His response to his clients:
The Vodafone issue has been there in the news for a few months now. It hasn’t cropped up suddenly. So, many investors probably knew about it but had no idea about their exposure to these troubled papers. Investors who invest with the help of a planner or advisor may have known this and taken some action if it was needed. Direct investors who are anxious right now clearly paid the price for not being aware.

Vodafone papers have hit some schemes badly and different schemes are dealing with the issue differently. The impact had already happened. Most schemes have marked their exposure down to zero per cent in these troubled papers. So, I don’t see any further impact on the NAV because of Vodafone papers. However, if some investors are not comfortable with such jolts, they need to reassess their risk appetite and whether they can invest in these schemes. Especially, investors who are investing in credit risk funds for extra returns.

Many investors are confused about the jargons being thrown around in news these days like- side pocketing and mark downs. For example, Franklin created a side pocket in their scheme and had restricted further inflows into the scheme for now. A ‘side pocket’ option allows a fund house to separate bad assets from other liquid investments in a portfolio which could get impacted by the credit profile of underlying instruments. This helps small investors from being hit by sudden exits of large investors. So, from here on the bad assets don’t impact your future investments in the scheme.

‘Marking down’ means cutting a scheme’s exposure to a particular asset or security. After all this, investors should take a call on whether they want to exit a particular scheme or not only on the basis of their risk appetite. Exiting because of the Vodafone issue might not help because you have already incurred the loss. However, investors should check their portfolio and try to get into details, so they are safe before something similar happens again. If you can’t read graphs and figure out basic details in the SID, take help from an advisor.